News

Fight or Flight for Retailers Hurt by Internet Sales

Two news reports were released this morning from Best Buy (BBY) and Barnes & Noble (B), illuminated the impact of online retail on its brick & mortar counterparts. Best Buy, for its part has been under heavy pressure from Amazon.com, which is generally able to offer better deals and eliminate the hassle of transporting large consumer electronics. Barnes & Noble, is also working on a new strategy after watching its profits disintegrate at the hands of online booksellers and digital editions for tablets.

Best Buy, for its part said its stores were attracting fewer customers in the weeks leading up to Christmas and announced today that sales at stores operating for at least 14 months, as well as websites and other channels fell by 1.2 percent.

Best Buy blames the losses on steep competition from Amazon (AMZN) and Wal-Mart (WMT). The company's attempts to compete with online retailers and mega discounters with their own sales caused a massive decline in profit for the once dominant chain. The company reported fiscal-third-quarter profit sunk close to 30 percent as a result of the deep discounts it felt compelled to offer.

The strength of the online market place seems to grow each year, with consumer electronic stores and book stores seeming to suffer the most. Some retailers crumble while others try to fight back, though not always successfully.

Best Buy, for its part, is hardly giving up on being a major force within the consumer electronics realm. Instead, it is smartly adopting the “If you can’t beat them join them,” mentality by boosting its relevance as an e-tailer and cutting operating costs by minimizing its retail space. If Best Buy can begin offering competitive pricing online against Amazon, it may have a chance of coming back. The difficulty might lie in the fact that even if it dials back its brick & mortar locations, it will still face an overhead that Amazon does not.

There’s also the factor that Amazon has already cemented itself in the mind of consumers as a place to pick up their TVs and iPads for lower prices. Best Buy will have the additional struggle of luring back customers that have already strayed.

This is similar to what happened to Barnes and Noble. There has long been an awareness that digital books may eventually cut into sales of physical books, but Barnes & Noble, perhaps convinced its retail experience would counteract this effect, made only a half-hearted attempt to battle it. In 1998, Barnes & Noble released the first digital reader. Perhaps a lack of infrastructure within the digital book marketplace or an unattractive price point, led the device to be largely ignored. Barnes & Noble then dismissed the business as unprofitable in 2003, and began drinking Starbucks in its conveniently connected café, until it was arguably too late.

For more than a decade, technological shifts have been chipping away at Barnes and Noble and the company has allowed it to happen. After abandoning its idea the first time, the company did not attempt to be competitive within the digital book market, either from a device or licensing angle until just a few years ago.

Only this year did the company’s Nook tablet gain some market share among tablets. For the most part though, the Nook is on an uphill battle. E-readers have been gaining popularity for years and most users are already comfortable with their existing marketplace for digital books.

Barnes and Noble is playing a game of catch up now and its attempts to regain its relevance after the fact have proved costly, bringing the company to a critical juncture. The investment in the development of the most recent Nook has caused Barnes & Noble's bottom line to sink to new lows. Its EBITA sunk to $163 million in the fiscal year ending in April from from $281 million in fiscal 2010.

The battle between the Internet and Brick & Mortar retailers will continue to result in fatalities over the course of the next couple of years. Those retailers that are able to fight will be the ones who make the shift to e-commerce, quickly and effectively.

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